Recipe for Iraq's economy: oil, entrepreneurship

Top priorities now: ending sanctions, restoring the flow of oil and food aid, and getting cash to Iraqi workers.

By , Staff writer of The Christian Science Monitor

For years, Iraq's economy has been held back by corruption, war, and an inefficient "command" structure in which major businesses were government-run.

Now, the economic questions facing Iraq are as basic as this: Can Iraq be converted to some form of capitalism, as Bush administration officials would like to happen, or will it follow a socialist model?

Iraq has some building blocks for a free-enterprise economy. Before the devastating war with Iran in the 1980s, Iraq had a growing middle class and one of the better education systems in the region. Iraqis returning from exile, moreover, promise to bring with them money and business skill.

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Yet for now, both US officials and Iraqis are consumed with the most basic questions: establishing a currency, restoring electric power, staving off hunger. The top priorities are humanitarian aid, restoring order to ransacked urban areas, and getting Iraq's oil revenues flowing again.

The oil issue is tied to lifting the 12-year-old United Nations sanctions on Iraq. President Bush called for that last Wednesday. But a UN Security Council resolution to lift economic sanctions requires approval by France and Russia - nations that did not support the recent US-led war.

Analysts wonder if the dissenting nations will withhold a quick decision in an effort to leverage a greater role for the UN and themselves in Iraq's reconstruction.

Even under the sanctions, Iraqis demonstrated entrepreneurial initiative.

"They had to scavenge and recycle to keep power plants and water facilities going," says Frederick Barton, an economist at the Center for Strategic and International Studies in Washington. A black market also flourished, which could evolve into legal commercial activity.

About 2 million Iraqis work for the government, a relatively high proportion of the working-age population in the nation of perhaps 24 million people.

Salaries and pensions of state employees could be covered in local currency - at least until now. In the present turmoil, the dinar has become of questionable value. A new currency is planned.

At present, $1.7 billion of confiscated Iraqi assets abroad will be used to pay Iraqi civil servants in actual US currency. That infusion of cash could help avert an all-out economic collapse.

While the rise of free-market businesses could dramatically boost Iraq's long-term prosperity, another resource - oil - has a crucial role to play. And in this region it has generally been government-controlled.

Other Iraqi exports are negligible. So the US is counting considerably on oil revenues to fund reconstruction.

One sign of oil's significance is that the Oil Ministry building in Baghdad survived both the bombing and subsequent looting. When US forces moved into the city, they quickly protected it from damage.

Iraq has been receiving $14 billion to $15 billion in legal oil revenues in recent years under the UN oil-for-food program. That amounts to about $600 a head. But under sanctions, Iraq's economy has, as Harvard University historian Robert Owen puts its, "gone into free-fall." Iraqis became increasingly poor.

A quarter of the oil-for-food revenue has been used to compensate individuals harmed by the invasion of Kuwait. That UN compensation program may or may not begin to cover claims by governments and corporations. The US government is seeking a quick reduction in Iraq's massive foreign debts of $383 billion.

In any case, the oil money alone will not be enough to finance reconstruction.

Congress recently authorized $2.47 billion for relief and reconstruction in Iraq. This will be used to repair of war damage and for other immediate needs specified by the de facto ruler of Iraq, retired Army Gen. Jay Garner, and his Office of Reconstruction and Humanitarian Assistance.

A host of contracts to meet these needs has been already awarded or is planned.

The US and other countries have also given money to UN agencies, such as the World Food Program, to deal with Iraq's immediate needs for food and other aid.

Over the longer term, the future of Iraq's oil industry must be decided. Will it be partly privatized, or left under the complete control of the Iraqi National Oil Co.? Presumably a new Iraqi regime will decide.

Patrick Clawson, an economist at the Washington Institute for Near East Policy, suggests the "Saddam program" be followed. In 1989, Saddam Hussein proposed that the national oil company look after existing oil fields, and that new fields be developed by foreign oil companies under production-sharing deals. He reaffirmed this plan in February.

Critics call this "privatization in disguise," but privatization is exactly what free-enterprise enthusiasts in the Bush administration advocate for Iraq's oil, petrochemicals, and other state enterprises.

Multilateral agencies such as the World Bank are expected to send out staff soon to assess the development needs of Iraq. This could take months. World Bank President James Wolfensohn calls Iraq a country that "would respond quickly" to aid

A long-term hope of Harvard's Mr. Owen is that the Iraqi economy can be diversified, with more backyard industry, a thriving agricultural sector, and a revival of small merchants. Shiite muslims, the key entrepreneurial class at one time, were repressed under Hussein's Sunni regime.

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